Minimal Wages

In a recent speech on economic inequality, President Barack Obama drove home his argument for raising the national minimum wage with a quotation: “They who feed, clothe, and lodge the whole body of the people should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.” Karl Marx? Franklin Delano Roosevelt? No: Adam Smith, described by the president as the “the father of free-market economics.” Not that FDR would have disagreed with Smith. Before helping to establish the nation’s first minimum wage in 1938, FDR declared that “no business which depends for existence on paying less than living wages to its workers has any right to continue in this country.”

Today many businesses in this country depend, if not for their existence, then for some of their profits on paying less than living wages to their workers. The government keeps many of these workers out of poverty by providing them with tax credits and public assistance—in effect subsidizing their employers by making up for inadequate wages. A full-time worker making the current minimum wage ($7.25 an hour) earns just over $15,000 a year, almost 20 percent below the poverty line for a family of three. If such a family is to be “tolerably well fed and lodged,” they will need food stamps and housing subsidies. Many of them, lacking employer-based health insurance, will also qualify for Medicaid. From time to time, a big company will unwittingly acknowledge that many of its own workers don’t make enough to meet basic needs. A Walmart in Canton, Ohio, was recently embarrassed by reports that it had organized a Thanksgiving food drive for its “associates.”

It wasn’t always this way. The minimum wage in 1968—$10.65 an hour in today’s dollars—was just over half the country's median wage. If it had kept up with inflation and gains in labor productivity since then, it would now be $25 an hour. No one in Washington supports raising the national minimum wage that high, but Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.) have introduced legislation that would raise it to $10.10 and index it to future increases in the cost of living—making the minimum wage not only more fair, but also more predictable and less subject to political exploitation. The Economic Policy Institute estimates that such legislation would affect 30 million American workers.

Contrary to popular misconceptions nourished by some in the media, most of the low-wage workers who would benefit from a higher minimum wage are not teenagers earning a little pocket money and learning some basic job skills. More than 90 percent of them are adults and almost a third are parents. The federal government spends around $7 billion a year on public assistance just for the families of fast-food workers. If conservative lawmakers are serious about streamlining entitlement programs and promoting self-reliance, they should be lining up behind proposals to raise the minimum wage.

So why aren’t they? It isn’t for lack of public support. A large majority of voters from both parties are in favor of raising the minimum wage. Whatever their opinions about welfare, most Americans agree with Adam Smith that those who work for a living should actually make one. Opponents of a higher minimum wage say it will only hurt the poor by reducing the number of jobs: when labor costs are higher, they warn, employers will hire fewer workers. This argument has a certain intuitive force, but several recent studies suggest that modest minimum-wage increases have no significant effect on employment levels. Lobbyists for retailers and fast-food restaurants also argue that higher wages will drive up business costs, which will be passed along to consumers as higher prices. But research suggests that a $10.10 minimum wage would add only a few pennies to the price of a hamburger. The lobbyists don’t mention that the big corporations they represent could also absorb some of the higher labor costs by accepting lower profit margins. Some of what a McDonald’s franchise owner pays in higher wages, for example, ought to come out of the fee he has to pay to the McDonald’s Corporation, which made $5.5 billion in profit in 2012.

A higher minimum wage would be good for the nation’s economy. It would stimulate demand by giving low-wage workers more spending power. It would save Washington and the states billions of dollars on entitlement programs by reducing poverty. But the argument for raising the minimum wage is as much moral as economic; it is an argument about fairness and the dignity of labor. No one who works full time in the richest country in the world should need to supplement her income with handouts, public or private. Or as the president put it in his speech, “If you work hard, you should make a decent living.” Adam Smith couldn’t have said it better.

Comments

A raise in the Federal minimum wage to $10.10/hour or something in that vicinity would make a difference for many workers--a twenty-nine percent increase would have dramatic impact for those who get it, and as The Editors say, the impact on the unemployment rate would probably be neutral, and too little to measure. (Though, for the few who find themselves at the margin and negatively affected, the problem is serious.) Raising the minimum wage to $15/hour or something higher, as some suggest, maybe a very different proposition. The micro example was seen a few months ago when WalMart cancelled plans for new stores in Washington DC after teh city council passed an ordinance requiring large corporations to pay $15/hour minimum. WalMart's action caused real estate investors to suspend plans for a new mall that would have contained one of the WalMart stores. In this case, the mayor vetoed the council's bill. One wonders about the impact on low-income families in DC from cancelled construction projects and absence of an "Always Low Prices" WalMart known to sell groceries at on average 20%+ lower than competitor supermarkets.

FDR tried to establish living wages with his National Industrial Recovery Act. At first there were parades in the street welcoming this new age. A year later, the whole project had turned into a quagmire with protests by consumers and businesses. Two years after enactment, the Supreme Court found the Act unconstitutional. The unemployment rate was still 20%, and that with one out of five employed people working for the government. Our national experiment indicates that major wage intervals by fiat just don't work.

Many of us long for better prospects for workers trapped in low-wage jobs. The only real, lasting solution is a surge in new jobs that require skilled or semi-skilled labor. That requires innovators and investment. It will also require a public education system that prepares students for science, math, engineering and technology jobs. As recently reported, our school students are testing lower than their peers in many other countries. We need to remedy that in order to do justice to people who already work hard, and want a better life.

One more point, if I may. "Some of what a McDonald's franchise owner pays in higher wages, for example, ought to come out of the fee he heas to pay to the McDonald's Corporation, which made $5.5 billion in profits in 2012."

How do the Editors come to this conclusion? Did they check to see whether the franchise owners obtain a higher return on their equity than McDonald's Corporation obtains on it's shareholders' equity? (I suspect not, since there are many franchisees, and some are privately owned so they do not publish financial results. Are the Editors aware that there are 28 thousand franchise-owned McDonald's restaurants, compared to 7 thousand corporate-owned? The Editors reimbursement scheme would put more than a minor drain on those $5.5 billion of McDonald's profits. And who are the McDonald's shareholders that would be affected by the drain? They are individuals, pension funds, endowments, mutual funds (which are usually owned by small investors), which would receive, under the Editors plan, a reduction in the $2.9 billion of dividends that McDonald's Corporation paid out in dividends from those 2012 profits. Those shareholders are the ones who had invested $2.9 billion in shareholder equity that makes the McDonalds business possible. The Editors plan might then be restated as "The shareholders of McDonald's should give up some of their dividends to compensate franchise owners (who may be earning more, or less, return on investment than the corporation's shareholders)." Is there somehting I'm missing?

Is it necessarily a problem that a minimum wage job isn't enough to support a family? Such a job should certainly support a single person, adequately but not all that generously. Remember, this is a minimum we speak of. But how many people should a single minimum-wage job support? And why that number and not one [or two, or three] more or less? I don't see these sortf of questions being raised, let alone discussed, and it seems that we probably should define our terms a bit more carefully and clearly. They pop up often in the discussion, but what exacly are 'we' saying?

I am a strong supporter of work providing a "living wage," in fact a wage that would allow one worker to support a family. However, how to get there without doing more harm than good is the conumdrum. Investment in superior education, apprenticeship programs, new industries, and a range of similar initiatives may be more effective in achieving that goal than a federal government mandated raise in the minimum wage. However, I believe it is worth experimenting in minimum wage increases on local and state levels first, before considering a national raise. Let's see how those limited initiatives work, some have been enacted alreay, or not, before considering going national, Also, if a major national minimum wage increase is implemented it should be done in stages, to gauge the effectiveness over time, and to give the labor markets time to adjust. Also, an effective immigration reform would go a long way to stabilize the low-end labor market, by ending illegal immigration and by providing stabiltiy for both the immigrants already in the country and those who may wish to hire them legally.

The 1938 quote from FDR that "no business that depends for its success on paying less than a living wage, has any right to exist in this country" should elicit belly laughs, since we now know that FDR wanted those jobs to feed families in other countries.

"Our national experiment indicates that major wage intervals by fiat just don't work."

Joseph,

Like so many, if not all, apologist for greed you continue to make broad statements supporting your perceptions while damning those who do the same for theirs. You consistently remark in the age old method of "as if" reality, failing to note with any consistency or depth the sizeable forces which have fought mightily against any local or national policy they preceived to not benefit their right to rule. Which, in a group unable to discern the usefulness of differeniating between an economic and a religious model, requries control of the bulk of materlal wealth.

As for FDR's efforts, it is not a small matter that the unspeakable horror that was growing in self justification and power in western europe during his first and second terms as presidenct were given support in word and deed by more than a few men considered by much of American history to be stalwarts of free enterprise. If you wish to debate an issue both sides need attention otherwise you are not debating you are preaching or, if you like, in the vernacular of a pure capitalist, marketing. Capitalism in and of itself has no soul. We humans do.

Whew! An increase in minimum wage law is not the same as armed robbery. It will likely be phased in with everyone given time to adjust. The same will happen with the ACA. As people learn and adapt, it will become as smooth and accepted as social security or Medicare. The USA is not broke nor bereft of resources; the stock market rose nearly 36% last year. Wages? Definitely not so much...